Oil waits on Fed as geopolitical risks demand attention

The imagination is how things get done. You have to cultivate creativity.

Russell Simmons

The main economic event of the day will be the outcome of the U.S. Fed FOMC meeting with the focus mostly on the statement as most in the market expects a rollover of existing accommodative policies. The announcement will be released at 2:15 PM EST as there is no press conference by the Chairman this month. There is a growing view around the markets and by many economists that the Fed could begin to look for an exit point for its very accommodative monetary policy sooner than originally anticipated. That said as of the last meeting the Fed has clearly tied their easing policies to the unemployment rate suggesting that they would not change until the unemployment rate drops to below 6.5%. It is currently at 7.8% but the economy seems to be picking up its recovery pace a tad. Of interest Fed Chairman Bernanke does not expect the unemployment rate to drop below 6.5% until 2015.

I do not expect the Fed to signal any changes but they are likely to make a comment that the U.S. economic recovery is improving. Some in the market may interpret that as a sign that tightening could come earlier than expected. We will have to see how the market reacts this afternoon especially since the equity markets are trading near multi year highs and remain in an overbought mode and susceptible to a round of profit taking selling.

The Fed meeting is not the only economic data point to hit the airwaves today. In Europe EU economic confidence data has already been released and it came in better than the previous month as well as higher than the expectations. EU business, consumer & economic confidence and industrial sentiment all improved in January versus December's data points. Another sign that the sluggish EU economy may be in the early stages of forming a turning point. The euro is also trading above the 1.35 level or the highest level since the end of 2011 a sign that the debt crisis may finally be in the background in Europe.

In the U.S. the fourth quarter GDP will be released this morning with the expectation at 1% versus 3.1% for the third quarter. The fourth quarter growth pattern in the U.S. was impacted by the devastating Hurricane that hit a major portion of the east coast and may not be reflective of the true growth rate of the U.S. going forward. In addition the employment data cycle also begins today with the release of the ADP private sector report which is expected to show about 175,000 new private sector jobs were created in January.

Oil prices have been slowly continuing to evolve in the uptrend that has been in play since bottoming in the middle of December. The spot Nymex WTI contract has breached the upward trending channel resistance level and from a technical perspective now has a clear path to the next resistance level of around the $100/bbl area. The spot Brent contract has also cleared its last technical resistance area of $114/bbl setting the stage for a test of the next resistance level of around $118/bbl. There is some minor resistance around the $116/bbl level that could serve to slow the upward advance... assuming the upward advance continues.